ADB: Inflation threatens East Asian growth

Surging inflation, a weak post-tsunami economic recovery in Japan and debt woes in the U.S. and Europe threaten East Asia's economic outlook, the Asian Development Bank said Thursday.

The Manila-based lender maintained its growth forecasts for 14 emerging and newly industrializing East Asian economies in 2011 and 2012. But it said the region faces risks that also include more volatile financial markets and destabilizing inflows of short term capital, also known as "hot money."

The ADB's growth forecasts were unchanged from a report in April, with East Asia forecast to expand nearly 8 percent this year and next. It forecasts China's gross domestic product growth at 9.6 percent this year and 9.2 percent next year.

But it indicated that economic growth forecasts for China, Malaysia, Thailand and Vietnam would likely could be cut. That would also result in a downgrade for the region, which includes 10 Southeast Asian countries as well as the economies of China, Taiwan, Hong Kong and South Korea.

In the first half of 2011, economic growth across East Asia eased from a blistering pace as inflation surged across much of the region, driven by higher commodity prices and strong economic recovery.

"Rapidly rising inflation risks a wage-price spiral that could derail the region's recent strong growth," the report said, noting that inflation in many economies has risen above 10-year averages.

The report also detailed other sources of rising prices.

In many East Asian economies property prices are climbing quickly.

The devastating tsunami and nuclear disaster in Japan in March has also spurred a debate over the use of nuclear power, which could drive up energy prices by boosting demand for other energy sources such as oil and gas.

The threat of inflation has been a major worry in Asia this year. The ADB warned in April that surging food prices of 10 percent on average in many Asian economies could drive 64 million more people into poverty.

Iwan J. Azis, head of the lender's Office of Regional Economic Integration, said he expected governments to use a mix of different methods to fight inflation, including allowing their currencies to strengthen. That would make imported goods including food cheaper.

The ADB's economists also fretted about the dismal prospects for the U.S. and Europe, which are plagued by high unemployment and debt problems. Both are major customers for East Asia's exports.

Azis warned that the region could also be hurt if the U.S. government's top-notch credit rating is downgraded amid fears that U.S. lawmakers may fail to come up with a way to prevent a debt default in the world's biggest economy.

That could depress the dollar against other currencies, hurting Asian governments that hold large amounts of U.S. government debt in their foreign reserves, Azis told reporters in Beijing.

China is the biggest holder of U.S. government debt, with $1.15 trillion in Treasury debt by the end of April, according to U.S. government data released earlier this month.

Meanwhile, Japan's economy's, already struggling with recession following production disruptions caused by the tsunami, must also cope with a strengthening yen, which will hurt its exports by making them more expensive.

"If the recovery in Japan, U.S. and eurozone falters, sluggish external demand could once again disrupt the region's exports," the report said.